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South African Rand Forecasts Lowered at Julius Baer

- The Rand has given back most of its Ramaphosa relief gains

- SARB unlikely to raise interest rates for remainder of 2018

- ZAR volatility forecast to remain high, GBP/ZAR and USD/ZAR targets adjusted

South African rand forecasts lowered

Image © Pound Sterling Live

Swiss bankers Julius Baer have today confirmed to clients they are lowering their forecasts for the South African Rand.

The call comes as the South African currency continues to struggle; this week reaching fresh seven-month lows against the US Dollar and British Pound.

Julius Baer analyst Annabelle Rey notes the currency has in effect now surrendered all the gains made since the election of Cyril Ramaphosa as the head of the ruling party ANC last December.

"Recent economic data has been disappointing such as a stronger contraction than expected in the gross domestic product (GDP) in the first quarter 2018, May’s purchasing managers’ index (PMI) falling into contraction territory and a wider current account deficit than expected in the first quarter," says Rey, giving one reason why ZAR has underperformed.

Rey believes markets are questioning whether new President Ramaphosa and his government will be able to turn around the economy.

Another reason for the Rand's underperformance is of course external with the currency finding itself caught up in an emerging market sell-off, in place since late April due to a stronger US Dollar and rising interest rates in developed economies which in turn push up the cost of borrowing in foreign exchange terms in developing markets.

More recently, an escalation in global trade tensions, sparked by US President Donald Trump, has given markets cause for concern and Rey argues ZAR is more vulnerable to this development than other currencies due to South Africa’s structural current account deficit.

Furthermore, the currency is unlikely to find any support from its central bank anytime soon.

Inflation data for June published this week eased to 4.4% year-on-year, remaining well within the 3%-6% central bank’s target, "the Rand should not receive any support in the form of an interest rate hike this year," says Rey.

Typically rising interest rates would signal to global investors that the potential return on cash investments in South Africa is rising - they would then borrow on low interest rate currencies and send the money to South Africa to seek out a greater return. This flow of money in turn bids up the value of the Rand.

Hence, rising interest rates are a good thing for a currency, provided the underlying economy is relatively sound. Suggestions that the SARB has no need to raise interest rates and therefore provide an incentive for foreign capital to come to SA is therefore a potential negative for the currency.

While Julius Baer don't see inflation going higher (recall central banks raise interest rates in response to fears inflation is running too hot) other analysts do warn that inflation is in fact likely to rise over coming months.

"We estimate that the long-term structural inflation rate in SA is around 5.5% y/y and continue to forecast a 25bp hike in the repo rate in January 2019, another in March 2019 and a further 25bp lift in 2020 in order to return SA interest rates to neutral levels," says Lara Hodes, an economist at Investec Bank.

Julius Baer are certain of is elevated levels of volatility in the currency over coming weeks and months and they adjust their three-month forecast to USD/ZAR 14.3.

Given that Julius Baer's GBP/USD forecast for the coming three months time is 1.28, their forecast for the GBP/ZAR cross is 19.10 in three months time.

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